November 8 th, Not Your Typical Tax Update

Transcription

1 November 8 th, 2016 Not Your Typical Tax Update

2 Discla im e r This document and information is provided by Ary Roepcke Mulchaey, P.C. and the presenter for general guidance only, and does not constitute the provision of legal advice, accounting services, investment advice, written tax advice, or professional advice of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisors. Before making any decision or taking any action, you should consult with a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided as is with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

3 Ohio Joint Filing Cre dit Tom has W-2 income of $600k Tom has 1099 consulting income of $40k Sally previously worked, but is now a stay at home parent. Sally has a rollover traditional IRA with $50k Sally s only current source of income is interest, dividends and capital gains from her brokerage account With some simple planning these clients can get PAID to convert Sally s traditional IRA into a Roth IRA!

4 Qua lifying incom e Credit is limited to a maximum of $650 Each spouse must have at least $500 of Qualifying Ohio income What is Qualifying Ohio income? Includes Wages Schedule C/business income IRA income Does not include Social security benefits Interest, dividends, capital gains Royalties Rents State and local refunds

5 Generate $500 Convert $500 of Sally s traditional IRA to Roth IRA Consider the impact of any non-deductible contributions Could also generate wage or 1099 income for spouse via Tom s schedule C for work she assists him with

6 Tax summary

7 Oh io BID

8 Overview For tax years 2015 and forward, business income from sole proprietorships and pass-through entities included on a taxpayer s individual income tax return will be taxed separately from nonbusiness income. i tax year filing - This business income will be reduced by the 100% Business Income Deduction (subject to a $250,000 max. deduction) and the remaining taxable business income will be taxed at 3%. ii tax year filing - This business income will be reduced by a new 75% Business Income Deduction (subject to a $187,500 max. deduction) and the remaining taxable business income will be taxed at 3%.

9 Business income Business income could include the following Distributive or proportionate shares of income from a pass-through entity (including a partnership, S Corporation, or LLC) Income from a sole proprietorship Income from farming Compensation or guaranteed payments made by a pass-through entity to a 20% investor under ORC (A)(7) Does NOT include C-Corporation income or wages

10 De d u ct ion In our initial case study, Tom had consulting income of $40k that would be reported on schedule C. In 2016, the entire $40k would be a tax deduction on their Ohio return In 2015 and 2014, 75% of the $40k would be a tax deduction on their Ohio return In 2013, 50% of the $40k would be a tax deduction on their Ohio return

11 Consider wages Sarah owns 50% of a S-Corporation She is paid a wage of $200k She also receives a K-1 with $100k of income The flow-through income on her K-1 would qualify for the deduction Since she owns 20% or more of the entity, she can also include her wages Thus, her total Ohio Business Income would be $300k

12 Tax savings 2015 Tax year

13 Often missed There are still many taxpayers who are not taking full advantage of this deduction We have taken over tax clients where the former CPA was not taking the deduction or maybe wasn t adding back qualifying wages Self-preparers rarely take the deduction as it doesn t automatically flow in Turbo Tax Be sure to review the Ohio return for your clients to make sure they are taking advantage of this great deduction! Amended return(s)!

14 Backdoor Roth IRA Rule change in 2010 permitting Roth IRA conversions regardless of income (previously not allowed with AGI of $100,000 or higher). Make non-deductible contribution Then convert to Roth with no tax Must consider all pre-tax IRA accounts when making conversion Planning opportunity Roll IRA funds into a 401(k)

15 How long to wait? One day? One month? One year? No specific guidance issued by IRS on this topic Step Transaction Doctrine

16 Kit ce s s t e p s How To Do A Backdoor Roth IRA Contribution Safely Verify there are no other pre-tax IRAs If there are, roll over existing pre-tax IRAs to a 401(k) (if available) to avoid the IRA aggregation rule Contribute to non-deductible IRA Invest funds in the non-deductible IRA Keep invested for 1 year (or if you re more aggressive follow the one-statement rule) Convert to Roth IRA Repeat steps 2-5 annually as desired Do not at any point along the way note that you are doing a backdoor Roth contribution! Source:

17 Re port ing issue s Review tax returns (especially self-prepared returns)

18 Roth planning Low income/loss years Convert extra.you can always reverse (partial or full) in following year until October 15 th filing deadline Consider multiple buckets for different assets

19 Ta x dive rsifica t ion Prudent to have buckets of pre and post tax retirement funds Many taxpayers end up with lower tax rates in retirement Can often receive IRA distributions and pay little tax

20 Ohio non-residency

21 Non-residency Bright-line The statute set forth two factors that would create an irrebuttable presumption of non-residency for Ohio state income tax purposes: Have fewer than 212 (previously 182) contact periods in state Have an abode outside the state Timely file affidavit verifying these facts (Due May 31 st ) Test does not apply for part-year resident year

22 Affida vit

23 Cunningham v. Te s t a CAUTION: Bright line gets blurry! Kent Cunningham, the taxpayer, owned homes in both Ohio and Tennessee for the entirety of the 2008 tax year Cunningham undisputedly had fewer than 182 contact periods with the state of Ohio in 2008 He also timely filed the non-resident affidavit for Ohio

24 What went wrong? Making a false statement If found to have made a false statement on the affidavit, the presumption of non-ohio domicile is not only removed, but is replaced with the rebuttable presumption that the taxpayer is actually domiciled in Ohio. In 2008, Cunningham also claimed a homestead property tax exemption. By claiming the homestead exemption, he asserted that his Ohio home was his principal place of residence and that he was domiciled in Ohio.

25 Board of Tax Appeals The BTA reversed the initial decision finding instead that the taxpayer did satisfy the bright-line test since he met the criteria The point of the bright-line test was to avoid the common law tests Ohio Rule

26 Common law Examples of Common Law Tests: (Ohio Rule ) There are several more these are the first 7 (1) The location of financial institutions in which the individual or the individual's spouse have any accounts, including, but not limited to, checking, savings, certificates of deposit, or individual retirement accounts. (2) The location of issuers of credit cards to the individual or the individual's spouse or any other persons making installment loans to the individual or the individual's spouse. (3) The location of institutional lenders which have made loans to or loans which are guaranteed by the individual or the individual's spouse. (4) The location of investment facilities, brokerage firms, realtors, financial advisors or consultants used by the individual or the individual's spouse. (5) The location of either the insurance company that issued or the insurance agent that sold any policy of insurance to the individual or the individual's spouse including, but not limited to, life, health, disability, automobile, or homeowner's insurance. (6) The location of law firms, accounting firms, and similar professionals utilized by the individual or the individual's spouse for legal, tax, accounting, financial, or retirement services. (7) The location of physicians, dentists, osteopaths, optometrists, or other health care providers, or veterinarians utilized by the individual or the individual's spouse.

27 Ohio Supreme Court Reversed decision of the BTA Statute requires the verification of domicile separate and apart from the verification of contact periods and abode The court explained that the Commissioner can determine that a false statement was made when he has information that furnishes a substantial basis for rejecting the claim of non-ohio domicile

28 Im plica t ions Taxpayers should now be sure to consider common law factors Be sure that the basics are covered (license, voting, plates, real estate reduction, etc) Home exemption example Taxpayers should seek professional guidance if dollars are significant Credit card tip

29 Re side ncy t ip

30 Days out of city How many people live in a non-taxing city? How many people work in a city with a higher tax rate than their resident city? How many people ever travel for work or work from home?

31 Case study John makes $400k per year Travels or works from home 34 days during the year Works in city with tax rate of 2.5% Lives in non-taxing city

32 Finder tool taxweb/default_taxdistrictsummary.aspx

33 Finder results

34 Finder results

35 Schedule

36 Da ys ou t ca lc If you work 34 days outside of the 2.5% taxing district and received a $400,000 salary, you would only be required to pay city tax on $340,844 of those earnings. Your total city tax refund would be $1,479.

37 Partial savings Assume Sally receives a salary of $5,000,000. She works in Columbus (2.5% tax rate) but lives in New Albany (2.0% tax rate) and works 20% of the time outside of Columbus She would file a Columbus return reporting the days worked outside of Columbus and receive a refund of $25,000 She would then file a New Albany return reporting the salary not taxable to Columbus ($1,000,000), thus paying tax of $20,000 Her net savings would be $5,000

38 Other items Must have employer certify Keep detailed records Planning opportunity work more days from home? Forms vary by city Amend prior year(s)

39 AMT Subject that often comes up with clients/advisors Overview How to get out of AMT Items to consider if in AMT Planning considerations

40 AMT

41 Ways to avoid AMT Move to state with no income tax Rent a home to avoid deducting real estate taxes Do not hire a financial advisor or tax preparer Don t have kids

42 AMT

43 AMT, now what? Marginal ordinary income rate? Marginal capital gain rate?

44 AMT e xe m p t io n Now permanently patched Phase-out zone Every $4 of income reduces AMT exemption by $1

45 AMT e xe m p t io n Increase in AGI Decrease in Exemption (A) AMT Tax Rate (B) Exemption % (C=A*B) Effective %(B + C) Income by $1 by.25c 28% 7% 35% Income by $1 by.25c 28% 7% 35% Income by $1 by.25c 28% 7% 35% Income by $1 by.25c 28% 7% 35% Total change $4 $(1) 28%

46 Capital gain rate Adjusted gross income of $300k Taxpayer realizes $10k of long-term capital gain Marginal capital gain rate?

47 Lo n g-t e rm ga in 15.0% Capital Gain Tax 3.8% Medicare Tax 7.0% AMT Exemption Phase-out 25.8%

48 Accelerate incom e Accelerate income into current year Typically taxpayers want to defer income Current rate is 28% (35% in phase-out zone) Future rate 39.6% or more?

49 Case study Greg s current income is $525k Greg has $400k of options that he could exercise Greg will retire within the next few years Disclaimer: Does not consider fluctuations in stock price.

50 50k Increase Exercise shares to increase income by $50k 152, ,316 = 14,450 14,450/50,000 = 28.9%

51 Case study Current Marginal vs Highest Bracket at Retirement Increase in AGI $50K of options in current year $50k of options in year of retirement Marginal Rate 28% 39.6% or more?

52 AMT ch a r t

53 Big incom e ye a r Luke is leaving his employer and will have a large income year Luke will not be in AMT due to large income Income will be reduced in the following year State income taxes often under-withheld

54 State payment by Ohio balance due of $7,888 Federal Savings of $3,121 ~39.6%

55 Next year Income will be down Tax deduction would be large Recipe for AMT by Ohio balance due of $7,888 May get little or no benefit for taxes Federal Savings of $922 ~11.7%

56 Tim ing of de duct ions When making large itemized deduction payments (S&L tax, RE tax, charitable, agent fees, etc) be sure to run a tax projection and consider multiple years

57 Pe a se lim it a t ion The Pease limitation on itemized deductions is named after former Congressman Donald Pease (D-OH) Reduce the itemized deductions allowed by the lesser of (AGI - threshold) * 3% or Nonexempt Itemized Deductions * 80% The threshold amount is indexed for inflation, but the 2016 amounts are listed below based on the taxpayer s filing status: Single: $259,400 Head of Household: $285,350 Married Filing Jointly: $311,300

58 Pe a se lim it a t ion Adjusted Gross Income $6,191,000 Married Filing Joint Threshold $311,300 Excess $5,879,700 Rate 3% Pease reduction $176,391

59 Pe a se lim it a t ion Federal savings of ~18.6% due to Pease limitation Federal Savings of $55,840 ~18.6%

60 Pe a se lim it a t ion Make contribution in lower income year. Federal Savings of $91,480 ~30.5%

61 Bunch deductions Make two years of contributions in one year The additional $300k saves 39.6% Also consider contributing appreciated LTCG stock Federal Savings of $118, %

62 Education planning Joe and Sandy are high income earners and pay $25,000 in tuition fees for their son Ryan (age 20). Due to Joe and Sandy s high AGI, they do not receive any federal benefit claiming Ryan as a dependent or any education credit or deduction. Ryan is in his second year of college and has wages of $2,500 and investment income of $10,000.

63 Education planning Ryan is subject to kiddie tax. If Joe and Sandy claim Ryan, Ryan s federal tax liability would be ~$2k. By Joe and Sandy NOT claiming Ryan: Ryan is not allowed to claim himself, BUT. Ryan could take the nonrefundable education credit on his return resulting in no federal tax liability.

64 Education planning

65 Self rental Erica has a dental practice and is taxed as an S-Corporation. Erica rents a building she owns to her dental practice. Typically, rental properties are treated as PASSIVE income (and are subject to the 3.8% medicare tax) BUT in this case, since Erica is renting her property to a business she materially participates in, the rental income is considered NONPASSIVE. Example: Erica s overall AGI is $450k. She has net rental income of $30k. By treating the $30k as nonpassive income instead of passive income, Erica avoids the Net Investment Income Tax of 3.8%

66 MFS vs MFJ Ohio has same tax bracket whether filing separately or jointly Must file same as Federal Joint filing credit

67 MFS vs MFJ

68 MFS vs MFJ Consider impact of Medicare Part B premiums If AGI too high, you pay an Income Related Monthly Adjustment Amount (IRMAA)

69 Questions? Direct: